Final answer:
To estimate Free Cash Flows (FCFs) in the DCF method, present discounted value calculations are performed for each expected cash flow, using a discount rate to compute their present value. These present values are then summed up, and if applicable, divided by the number of shares to estimate the value per share, taking into account that the calculations are based on projections and the discount rate is subjective.
Step-by-step explanation:
Estimating Free Cash Flows (FCFs) in the DCF Method:
To estimate Free Cash Flows (FCFs) in the Discounted Cash Flow (DCF) method, you perform a present discounted value (PDV) calculation for each time period in which a benefit, or cash flow, is expected to be received. You apply a formula that discounts the future cash flows back to their present value using a selected discount rate (in this example, we're using 15%). This involves projecting the business's income and expenses to estimate the operating cash flows, then making adjustments for capital expenditures and changes in working capital to arrive at the FCFs. These FCFs are then discounted to the present using the chosen interest rate that reflects the time value of money and the associated risks.
After calculating the PDV for each period, these values are summed up to get the total present value of the expected cash flows. If valuing a company, you would then divide this total by the number of shares to find the intrinsic value per share. However, understanding that these are estimates and that selecting the appropriate discount rate is subjective, it's important to consider potential capital gains, dividends, and differing financial opinions on the future performance of the investment.